Investment Ideas

Factor Diversification

No single factor has consistently outperformed over time. For long term investors a multi-factor strategy provides the potential to achieve higher returns than traditional market-capitalisation indices.

Alexander Gladien, Dividends, Growth, Portfolio Construction, Returns, Rising Rates, Stock, Tax Loss Harvesting, Volatility

Factor based investing – or smart beta – generally refers to a category of rules-based approaches to investing. In our article, we explore the concept of factor based investing and how can it benefit your portfolio.

Diversify Your Exposure

Over the last five years, five different factors have exhibited the strongest performance. Growth topped the list in 2020, Quality in 2019, Minimum Volatility in 2018, Momentum in 2017, and Value in 2016. This demonstrates the historical volatility of single factor performance.

No single factor has consistently outperformed over time, as illustrated in the table below.

Because different factors may perform well at different times, investors may want to consider investments that diversify across multiple factor strategies. Combining, for example, volatility, value and quality factors may offset the cyclicality of single-factor performance, and achieve smoother returns over different business cycles.

Factor Diversification Chart

A Multi-Factor Mix

Harnessing the drivers of equity risk and return or factors, the SPDR® MSCI World Quality Mix Fund (Ticker: QMIX)  seeks to closely track the MSCI World Factor Mix A-Series Index, which is an equally weighted combination of three factor strategies —Value, Minimum Volatility and Quality. This means the fund holds a basket of stocks that are  “low risk” (minimum volatility), “inexpensive” (low price-to-fundamentals ratio – where fundamentals are book value, sales or cash flows), and “high-quality” (profitable, stable, and relatively conservatively leveraged).

The combination of these three factors, provides investors with a portfolio that aims to capture gains in improving markets while at the same time mitigate risk during periods of market volatility, at a lower cost than active management.



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